Stage set for a revival of gas drilling activity in Western Canada

NEB's nod on Shell export licence, Chevron facility may spur drilling

CALGARY — Federal approval of an export licence for Shell Canada Ltd.’s proposed liquefied natural gas plant only weeks after oil major Chevron Corp. took control of another major facility planned for the B.C. coast sets the stage for a revival in Western Canadian drilling activity that has withered amid languishing gas prices.

Canada’s National Energy Board on Monday granted Shell a permit to export up to 24 million tonnes per year of frozen gas, or 3.2 billion cubic feet per day, from a proposed terminal located near Kitimat, B.C. The export approval comes roughly one month after Chevron acquired more than 320,000 net acres of B.C. shale gas properties as part of a deal to buy a 50% stake in a rival LNG facility planned for Canada’s West Coast.

There’s got to be a huge amount of gas available to come on in order to underpin these facilities

The number of wells targeting natural gas in Alberta and British Columbia has plummeted as producers switch to targeting regions that yield more valuable liquids such as propane, butane and ethane. Activity could be poised to pick up now that three proposed LNG terminals have secured export licences.

“There’s got to be a huge amount of gas available to come on in order to underpin these facilities,” said Bill Gwozd, senior vice-president of gas services at Calgary-based Ziff Energy Group. “We just can’t ramp it up over three to four years. That means all that inventory has to be developed and set up and parked on the side.”

Calgary-based Precision Drilling Corp., which reports fourth-quarter results next week, said in October that Canadian drilling activity in the quarter ended Sept. 30 was down 29% compared to the year-prior period. Well-completions — the process of readying a well for production — dropped 31% during the same period, according to Trican Well Service Ltd., which reports at the end of February.

Partly as a result of a continued build up of activity in B.C.’s Horn River, Montney and Liard shale gas plays, the Petroleum Services Association of Canada now forecasts a 13% increase in drilling levels in B.C. this year.

The Liard formation is home to a monster prospect described by export proponent Apache Canada Ltd. on discovery as “one of the best shale wells we’ve seen in any play.” Apache estimates the formation, tucked just south of the 60th parallel about 150 kilometres north of Fort Nelson, B.C., could hold 48 trillion cubic feet of so-called “sales gas” that can be produced and sold.

Developing the massive volume — and, if resource estimates of B.C. shale gas potential hold, others like it — could well hinge on the large-scale LNG developments moving forward, said Peter Howard, president and chief executive of the government- and industry-funded Canadian Energy Research Institute (CERI) in Calgary.

“They have the licences to proceed but you still have to get that financial commitment to proceed,” he said Tuesday. “Development [of B.C. shale gas resources] will proceed only if those projects go ahead.”

Neither Shell nor Chevron has sanctioned its Canadian LNG proposal, but Chevron chairman and chief executive John Watson said last week the lead-time on LNG facilities in today’s market is “pretty close to six years.” A spokesman for Shell said the company welcomes the NEB decision “as a key milestone” but declined to comment further.

In a study published Monday, CERI underscored the challenges awaiting both projects, noting that exporting LNG is “becoming increasingly risky and less lucrative for North American companies.”

Asian buyers are increasingly demanding bargain prices for the furnace fuel, which typically fetches a premium in Pacific markets compared to North America because cargoes are linked to a higher-priced basket of crude oil blends.

At the same time, construction costs have surged. Mr. Howard said Chevron’s experience in Australia — where the price tag for its Gorgon LNG plant jumped US$15-billion last year to US$52-billion — could vault Shell into the lead on Canada’s West Coast.

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